Toyota, the transformer
Toyota is probably not the first company that comes to mind when you think of revolutionary innovations and industry transformations. In fact, Toyota is much more likely to be seen as a conservative, efficient and even boring manufacturing company. And that would not necessarily be wrong. The company is certainly not known for rock-star executives or grandiose, hyperbolic proclamations about the future. The company takes a quieter, more measured and much more humble approach to designing the future. Toyota believes in under-promising and over-delivering.
And deliver they do. In 2017, Toyota sold 10.5 million vehicles worldwide, second only to VW, which sold 10.7 million. Toyota’s market capitalization was the highest among automakers, at about US$184 billion, with a profit margin of almost 7%, and with the lowest vehicle incentives of any company. Toyota and Lexus topped Consumer Reports for quality in the last four years and have led JD Power and other quality surveys for many more. I could go on, but I think most would agree that Toyota is a formidable competitor and possibly the best automaker on the planet.
Despite fairly broad recognition of Toyota’s success, very few people recognize how its willingness to challenge the status quo through innovative product and process design has driven Toyota’s growth and success. In fact, I believe that over the last 40 years Toyota, more than any other automotive company, has driven drastic and fundamental changes in the automotive industry through the introduction of transformative processes and innovative products. In many ways, Toyota created the modern automotive industry we see today. And I believe they will continue to influence the future of the automotive industry, perhaps more than any other company, through their incredible product and process development capability.
Toyota’s approach is built around accepting a difficult challenge, working hard in small, steady steps as a team, learning through continuous experimentation and never, ever being satisfied with the company’s current level of performance in the pursuit of perfection. Over these forty years, Toyota has introduced hundreds of innovations to the industry, but let’s consider four game-changing examples:
The machines that changed the world: Seamless integration of product and process development to deliver maximum value to the customer across the entire value stream.
Toyota’s history of industry transformations began with the introduction of high-quality, fuel-efficient, safe and low-cost cars that completely changed customer expectations and shook up the automotive sector. These products forced a drastic change in the automotive industry and had effects on many others. Although TPS is rightly recognized as the powerful manufacturing system that helped make this change possible, it was product and process design that changed the game and served as the foundation for a product line-up and a cadence of new product introductions that transformed the industry. Designs that set a new standard of product quality and reliability for the industry, something competitors are still trying to match today. John Shook often talks about the radical difference between the product and process designs received by GM Freemont workers compared with the high-quality designs that NUMMI team members received.
Lexus: Pursue product perfection.
In 1983, Eiji Toyoda challenged the Toyota team to build nothing less than the best car in the world. At the time, even the idea of Toyota entering the luxury car market was ridiculous. And many automotive executives laughed at the time - and were eventually proven wrong. Lexus was launched in 1989 and, by 1991, had outsold Mercedes and BMW to become the best-selling luxury brand in the US. It also ranked first in JD Power for initial quality and customer satisfaction. The newly launched luxury brand challenged the status quo of European luxury cars and raised the bar to such an extent that it became the leading luxury brand in just three years and outshone the North American luxury brands. While the luxury car market is small in terms of units sold, only about 10%, it is very important for revenue, providing up to 50% of the profit for some automotive companies. The brand sold more than 300,000 units by 2005 and held the title of best-selling luxury brand until 2011, when it lost its position after a tsunami and an earthquake disrupted its production and supply chain in Japan. Today, Lexus has the best-selling luxury SUV and, in the words of Benjamin Zhang of Business Insider: "There's no debate: Lexus is the greatest success story in the auto industry of the past 25 years" (Benjamin Zhang, Business Insider, October 2014).
Prius: Never be satisfied and continuously raise the bar for product, process and people.
Long before anyone in the automotive industry thought about designing for environmental sustainability, in 1997 Toyota launched the first gas-electric hybrid, the Prius. In 1990, during a period of incredible success, Toyota president Eiji Toyoda issued a challenge by asking “how are we going to avoid becoming complacent as a company?”. He challenged his research and development team to drastically improve the way they developed products and to create a product for the 21st century. Once again, much of the industry mocked the oddly designed vehicle and predicted that it would, at best, be relegated to a small market niche.
However, with the Prius, Toyota designed a product that created demand where none existed and once again forced the rest of the industry to follow its lead. Clearly, the hybrid was a huge success, with cumulative sales of more than 6 million Prius and more than 10 million hybrid vehicles by January 2018. In addition, the Prius provided the model for the sustainable vehicles that came later.
Mirai: Take the long-term view, work with a set-based approach toward unknown future technologies and experiment to learn.
Mirai means future in Japanese, and this hydrogen-powered vehicle may be Toyota’s boldest experiment to date. I understand the debate over the potential effectiveness of fuel cells as an alternative energy source and, frankly, I found the amount of criticism on the Internet on this subject alarming. However, many of the critics seem to be missing two key points: 1) Toyota continues to invest heavily in several different technologies, including battery electric, hybrids and hydrogen across a variety of vehicle types. 2) From the outset, the Mirai team knew they were working on a product that would not gain wide acceptance for many years, probably for decades. Yoshikazu Tanaka, the Mirai’s chemical engineer, told Jeff Liker and me in an interview in Japan:
“Hydrogen is something we never expected to spread quickly. The use of hydrogen will not suddenly take off just because of this car. We were thinking very long term. In fact, we often used the phrase '100 years from now' to give the team the right picture. We wanted to be the pioneers who start this movement toward a hydrogen-based society". Tanaka went on to say: “We know we are just a small stone in the great sea. There is no guarantee of success, but if you do nothing, if you do not take a first step, nothing will happen".
The Mirai is an important piece of a long-term strategy for the company to reduce CO2 emissions by 90%. However, unlike companies such as Tesla, Toyota is planning a set-based approach to tackle the challenge. Mitsumasha Yamagata, chief engineer of Toyota Power Train Product Planning, predicts that up to 90% of all vehicles in 2030 will still use some kind of gasoline engine, and explained:
“Developing more fuel-efficient engines using gasoline and hybrid systems will be the best way to make an impact (in reducing emissions), and we remain committed to that. At the same time, we can use the technology developed for these powertrains in electric and fuel cell vehicles”.
This is consistent with studies by organizations such as the Center for Automotive Research (CAR), which found that “the Mirai is Toyota’s most challenging development project, because it requires not only innovative products but the transformation of the entire global infrastructure. However, they are approaching it as a challenge, as deep learning, with experiments and work teams taking incremental steps toward a compelling vision”.
A playbook for transformation?
As I said, Toyota may not be the first company you think of when you think of transformative product and process development, but perhaps it should be. The methods and practices Toyota uses have been adapted and successfully applied by companies large and small, in a wide variety of industries and places around the world. And that is precisely why lean product and process development (LPPD) matters: because it is so accessible to so many. You don’t need a rock-star genius CEO, and you don’t need to be a Silicon Valley startup to continuously develop the best products and processes in the industry and design for the future. And what may be even more important: in addition to being highly effective, LPPD principles and practices create a more respectful, much healthier and much more “adult” environment for team members. And that can transform the transformers.
